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Estimating hospital costs with a generalized Leontief function.

T Li1, R Rosenman

  • 1Department of Economics, Wylie Hall, Indiana University, Bloomington, IN, USA.

Health Economics
|September 11, 2001
PubMed
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This study on hospital costs reveals that outpatient services complement inpatient care, potentially increasing overall healthcare expenses. Profit-seeking hospitals effectively control costs, influenced by Medicare

Area of Science:

  • Health Economics
  • Healthcare Management

Background:

  • Estimating hospital cost functions is crucial for understanding healthcare economics.
  • Previous models often used translog functions, which may not be optimal for complex healthcare services.

Purpose of the Study:

  • To estimate a long-run hospital cost function using multiple outputs and inputs.
  • To compare the suitability of generalized Leontief and translog functions for hospital cost estimation.
  • To analyze the cost implications of service complementarity and economies of scale/scope in hospitals.

Main Methods:

  • Utilized a panel data set from Washington State hospitals (1988-1993).
  • Employed a generalized Leontief cost function, finding it more appropriate than translog for this data.
  • Analyzed input substitutability and output complementarity.

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Main Results:

  • Radiology, therapies, surgery, and inpatient days are substitutes for core inpatient services.
  • Outpatient services are complementary to core inpatient services, suggesting potential cost increases.
  • Hospitals exhibit significant economies of scale but limited economies of scope.
  • Profit-seeking hospitals demonstrate cost control, with Medicare's diagnostically related groups (DRG) proving effective.

Conclusions:

  • The choice of cost function (generalized Leontief vs. translog) impacts hospital cost analysis.
  • The complementarity of outpatient services may lead to increased overall healthcare costs.
  • Medicare's DRG system incentivizes cost control in hospitals.